Advances in Economics, Business and Management Research, volume 16
First International Conference on Economic and Business Management (FEBM 2016)
Study on the Liquidity Risk of Deposit and Loan Maturity Mismatch
in Commercial Banks
Baosheng Shi , Huangjin Liu *
School of Economic and Management in Nanjing University of Science and Technology,
China
*
Corresponding author: Huangjin Liu, Associate Professor, [email protected]
Abstract
Commercial banks must maintain a certain degree of mismatch to improve the efficiency of the use of
money, but excessive maturity mismatch may cause liquidity risk. Based on that, this paper introduced
the latest rules of the Basel Ⅲ, analysis the term structure of assets and liabilities and the liquidity
situation. We create a model of liquidity gap to give evaluation of the liquidity risk, referring to the
requirements of the net stable funding ratio. According to the result of liquidity risk measurement,
combining with the relevant conclusions of qualitative analysis, this paper gives some advices for
commercial banks’ liquidity management.
Key words: commercial bank; maturity mismatch; liquidity risk; risk management; liquidity gap
1 Introduction
Commercial banks encountered serious liquidity crisis in 2013 and suffered serious shortage
of money. All of the study show that the crisis mainly due to the term structure mismatch
between bank assets and liabilities in the banks. Commercial banks must maintain a certain
degree of mismatch to improve the efficiency of the use of money, but excessive maturity
mismatch may cause liquidity risk. In the pursuit of profit, the trend of long-term loans and
short-term deposits in banking institutions is very obvious, which adds the degree of maturity
mismatch and causes liquidity risk. Commercial banks must attach great importance to the
liquidity risk management, keep their term structure within a reasonable range to avoid
excessive mismatch and reduce liquidity risk.
Normal stable operation of commercial banks must ensure adequate liquidity assets. Liu1
summarized the formation mechanism of liquidity risk and pointed that the trend of the shortterm deposit and long-term loan was common in commercial banks. Banks applying liquid
assets to higher-yielding long-term loans, leading to a difficult liquidity and liquidity risk.
Zhu2 and Fu3 argues that the liquidity risk of commercial Banks can be reflected by the term
structure of deposit and loan. If the period of deposit is shorter than the loan’s, it will form the
maturity mismatch. If the degree of mismatch. In general, current deposit and long-term loans
accounted for a high proportion in commercial banks, which added the degree of maturity
mismatch.
About liquidity risk’s evaluation, many scholars adopt empirical researches4,5. The research
results show that the liquidity management of 5 major state-owned commercial banks is better
than the others, for the strong financial asset strength and dominant market position. The
liquidity risk is lowest. The liquidity risk in city commercial banks is relatively low because
of its positive risk management. Other joint-stock banks don’t have great management ability,
thus exist higher liquidity risk.
Copyright © 2016, the Authors. Published by Atlantis Press.
This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).
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The Basel committee promulgated the Basel III Accord, made the liquidity risk of the latest
international regulatory framework, introducing liquidity coverage ratio (LCR) and net stable
funding ratio (NSFR)6. The LCR addresses liquidity risk and is designed to ensure banks have
adequate liquidity to survive 1 month of stressed funding conditions. The NSFR addresses
funding risk and is designed to promote structural changes in the risk profiles of banks away
from short-term funding mismatches and toward more stable, longer-term funding of assets.
Banks that do not meet the NSFR need to reduce assets requiring stable funding and to
increase stable sources of funding. Peng7 argued that the application of the two indicators has
certain limitation. High quality liquid reserved assets refers to bonds or central bank bonds
which liquidity is poor in the secondary market. The available stable funds are primarily a
stable part of the deposit, but can’t accurately estimate. The special items of assets and
liabilities that the two indicators covered are too detailed which can’t be found in annual
report. So the new international indicator needs to adjust and reform according to the situation
of our country to ensure its implementation.
Based on previous studies, this paper will study the liquidity risk caused by the maturity
mismatch of assets and the liabilities in commercial banks, referred to the Basel III. The first
chapter introduces the background of this paper and the related research. The second chapter
introduces the term structure of commercial banks in our country and the liquidity level. And
then take an example of ICBC (Industrial and Commercial Bank of China) and evaluate its
liquidity risk, using the liquidity gap model. The final section concludes.
2 The situation of maturity mismatch and liquidity risk in commercial banks
2.1 Maturity structure of assets and liabilities
The deposit in commercial banks is mostly the current account while the loan mostly reflected
by medium and long term loans. Once medium and long term loans failed to be recycled,
commercial banks will encounter serious liquidity crisis. This paper studied the maturity
mismatch of depository financial institutions. The data of term structure was shown in figure
1.
5500000
70%
5000000
60%
4500000
50%
4000000
40%
3500000
30%
3000000
20%
2500000
10%
2000000
1500000
0%
2008
2009
2010
2011
2012
2013
2014
Medium and long term deposits
Medium and long term loans
Proportion of medium and long term deposits
Proportion of medium and long term loans
Fig. 1 – Condition of maturity mismatch in depository financial institutions
We can reach a conclusion that the commercial banks performed a certain degree of
mismatch. Long-term sources of funds can’t meet the long-term supply of funds. And the
long-term loans are more than the long-term deposits significantly which means a certain
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degree of maturity mismatch. Deposits demanding need be supposed by the current deposits
in commercial banks. And then we analysis the data from the 13 commercial banks and come
to the same conclusion. Commercial banks all have the phenomenon of maturity mismatch.
After that we found that the situation of ICBC is more obvious than other banks, so we will
choose ICBC as sample to study the relation of maturity mismatch and liquidity risk.
2.2 Situation of liquidity risk
Currently the liquidity supervision indicators mainly include loan-to-deposit ratios, liquidity
ratios, non-performing loan ratio, capital adequacy ratio. We can find the data from
commercial banks’ annual report between 2007 and 2014 to study the situation of liquidity.
We can find that the liquidity ratio performed well in these years, state-owned commercial
bank better than joint-stock commercial banks and city commercial banks. LDR in stateowned commercial banks and city commercial bank is also satisfied. Part of the joint stock
system commercial bank in some years showed the data more than 75%, which means
potential liquidity risk. Non-performing loans were in accordance with specified
requirements, in addition to the agricultural bank because of the historical reason and the
nature of the bank. The capital adequacy ratios are in line with the regulatory requirements.
Five state-owned commercial banks’ capital adequacy ratio is higher, showing it stronger
risk-response ability, while the joint stock system banks’ capital adequacy ratio is low, and
large state-owned commercial Banks, risk coping ability is weak.
But the perspective of these liquidity regulation indicators for liquidity risk evaluation is
relatively single, which can’t reflect the liquidity status of the commercial Banks. In practical
application, we tend to use the Dynamic indicators, such as liquidity gap, net current assets,
etc. These indicators can predict the supply and demand of bank’s capital in a certain period
of time. Therefore, this paper adopted the liquidity gap model, referred to the relevant
provisions of the Basel Ⅲ, to study the liquidity risk in ICBC which performed obvious
maturity mismatch.
3 Evaluation on liquidity risk under maturity mismatch
3.1 Model and data
The assets and liabilities in commercial banks mainly includes deposits and loans. So this
paper narrowed the scope of assets and liabilities to study the maturity mismatch of deposits
and loans and its liquidity risk. Set up models as follow.
Referred to the rules about high quality deposits and long trend of short-term deposits,
optimize the traditional liquidity gap model. We put the stable part of short-term deposits and
the long-term deposits as liquidity supply, the long-term loans as liquidity demand. The
updated liquidity gap model is as follow.
Liquidity gap = (Long-term capital supply + Stable part of short-term deposits)
- Long-term capital demand
(1)
If the liquidity gap is more than zero, which means liquidity supply can meet the liquidity
demand, there is no liquidity risk; If the gap is less than zero, then the bank will face a certain
degree of liquidity risk.
In addition, we put a indicator of liquidity gap’s proportion for comparing the liquidity level
in different banks and years.
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(2)
Gap’s proportion = Liquidity gap/assets in banks
3.2 Maturity mismatch
Sort ICBC’s data of short-term deposits, long-term deposits and long-term loans as table 1.
We can see that situation of maturity mismatch in ICBC didn’t appear serious before 2007
from table 1. However, starting in 2007, long-term deposits began to decrease, while the
medium and long-term loans increased gradually, and much lower than the medium and longterm loans. This means that the medium and long-term deposits in ICBC can't meet the
demand of the medium and long-term loans so that bank need to divert part of current
deposits to support long-term loans, leading to relatively serious maturity mismatch, existing
potential liquidity risk.
Table 1 – Term structure in ICBC
Years
Long-term available deposits
Short-term stable deposits
Application of long-term capital
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1,761,063
2,052,916
476,394
596,221
665,201
786,187
1,088,578
1,560,498
1,668,058
1,995,312
2,522,892
3,292,288
4,060,472
4,819,051
5,561,699
6,284,894
6,986,786
7,671,646
8,346,610
9,017,660
2,277,396
1,538,957
1,788,142
2,098,799
3,572,251
4,632,574
5,249,921
5,535,666
6,159,558
6,914,703
According to the above analysis, we put the stable part of the short-term deposits as another
source of funds for the long-term bank loans. If the stable part of short-term deposits can meet
the balance between the long-term deposits and loans, it will not produce liquidity risk. If the
balance can’t be offset by the stable short-term deposits, it will produce liquidity risk. Now
we will evaluate ICBC’s liquidity risk.
3.3 Liquidity gap
The HP filter method is adopted to estimate the long-term trend of short-term deposits.
According to the stable short-term deposits, we get the number of liquidity gap estimated as
shown in table 2.
Table 2 – Liquidity gap in ICBC
Years
Liquidity gap
Gap’s proportion
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2,006,559
3,806,247
2,748,724
3,316,473
2,654,649
2,438,507
2,825,443
3,696,478
3,855,110
4,098,269
0.311
0.507
0.317
0.340
0.225
0.181
0.183
0.211
0.198
0.194
ICBC’s liquidity gap show the positive results and is greater than zero, which means that the
effect of liquidity management is apparent with no significant liquidity risk. Although the
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phenomenon of maturity mismatch in ICBC is obvious, there is no risk shown up because the
stable short-term deposit covered a big proportion and can fill the gap.
From the number of liquidity gaps between 2005 and 2014 we can find the liquidity gap
appear to decrease in 2007 and 2009. According to the background, subprime mortgage crisis
in the U.S. evolved into a global financial crisis, influencing banking industry in our country.
In response to the debts and non-performing loans, the bank's liquidity began to decrease.
Financial crisis made our country banking industry suffer a serious dilemma, leading to a
serious trust crisis, liquidity crisis and subsequent impact which didn’t be eliminated until
2011.
Compare the gap’s proportion in different years. The proportion in 2008 decreased for the
financial crisis that banks didn’t have enough liquidity assets. Also, commercial banks
suffered a liquidity crisis in 2013 for money shortages events and the liquidity gap and the
proportion reduced obviously.
4 Conclusion
We see from above research that ICBC’s liquidity risk is not exposed because its stable part
of the short-term deposits can fully make up for the gap, although there is serious maturity
mismatch condition. We can also find that the financial crisis in 2008 and the "money
shortage" event in 2013 caused a certain influence for the commercial Banks' liquidity
management, and have a long-term impact. Observing other bank's annual report, large stateowned commercial Banks' liquidity gap are mostly high levels of positive which means the
strong coping capacity of liquidity risk. Joint-stock commercial Banks and city commercial
bank shows negative gap in some years for its weaker financial strength. In order to avoid
negative gap of liquidity risk, banks have to rely on current deposits, including the obvious
unstable fluctuation part in current deposit. if meeting financing difficulties, banks are likely
to face a liquidity crisis.
Besides, research shows that commercial banks’ maturity mismatch of assets and liabilities
can leading to serious liquidity risk. In this paper we also found that the maturity mismatch
can’t fully reflect the liquidity risk level. For example, although the maturity mismatch of
assets and liabilities in ICBC is obvious, there is no liquidity risk exposed due to its stable
part of the short-term deposits can fully make up for the gap. Instead, some banks, such as
Bank of Communications, show negative liquidity gaps and face serious liquidity risk, while
their maturity mismatch degree is low. Therefore, commercial banks must do strictly liquidity
risk management, formulate appropriate liquidity risk regulation and prevention strategy
according to the requirement of the relevant indicators, ensuring their liquidity and riskcoping ability, so as to guarantee the normal operation and profitability.
As a result of this paper, here are some recommendations:
(1) Strengthen the supervision on liquidity risk of maturity mismatch. Banking regulatory
commission (CBRC) should develop a suitable regulatory system according to the actual
situation of the bank. In the process of the implementation of the Basel agreement, the
regulatory index need to adjust to be more targeted according to the status quo of China's
banking industry. In addition, commercial bank, central bank, and the banking regulatory
commission and other departments should jointly set up deposit insurance system to
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relieve the pressure on central Banks and other departments when facing the liquidity
crisis.
(2) Attach great importance to the management of liquidity risk. Banks must strengthen the
management of maturity structure: optimize the term structure of assets and liabilities,
adjust the proportion of current deposit, mid-term and long-term loan; strengthen the
monitoring of loan quality, control the non-performing loan ratio. Commercial banks
should also attach importance to liquidity risk management, improve their risk
management system according to the Basel Ⅲ and relevant provisions of the liquidity
management indicators. In addition, commercial Banks should regularly conduct stress
tests to discover problems, preventing the liquidity risk.
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